Healthy Outlook

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Healthy Outlook
Patient is prepared for testing at RadNet’s Beverly Tower Wilshire Advanced Imaging Center in Beverly Hills.

Medical imaging company RadNet Inc. has been on a buying spree in recent months, and that’s had investors smiling as brightly as the light box that doctors use to read X-rays.

The West L.A. company, the nation’s largest owner and operator of independent medical imaging centers, has made three big acquisitions in the last four months, continuing an expansion drive. Armed with lots of cash from a $585 million debt refinancing early last year, RadNet has bought imaging centers to bolster its presence in the Northeast and has branched out into related fields such as radiology imaging software.

News of the acquisitions has doubled the share price of company stock since mid-September to close Jan. 19 at $3.84, near its 52-week high. The stock runup has come even though RadNet’s operating losses have exceeded analyst expectations as its imaging centers have reported declines in volume due to the recession.

What’s behind the stock gain, then? While analysts believe earnings are likely to remain soft for the next quarter or two, they said the acquisitions position the company well for significant future growth.

Analyst Arthur Henderson from New York-based Jefferies & Co. Inc. summed up one of the transactions – the $5.5 million purchase of a network specializing in emergency on-call imaging – this way: “While today’s news will not likely be a contributor to near-term earnings, we are encouraged by the attributes of this transaction and believe it will provide a solid backdrop for growth in the coming years.”

Jefferies has a “buy” rating on RadNet shares.

Growth through acquisition

RadNet was born in 1984 when founder Howard Berger set up an independent X-ray diagnostic imaging center next to Cedars-Sinai Medical Center called Primedex Health Systems Inc. Until then, most X-ray and other diagnostic scans were done in hospitals. In the early 1980s, the cost of imaging equipment began to decline and demand surged for imaging services as new machines were introduced. As a result, radiologists opened small imaging centers as lower-cost alternatives to hospital-based services.

Berger planned a network of these free-standing imaging centers, with the goal of becoming the nation’s largest provider of imaging services. He bought several Southern California imaging centers and then spread out to Florida and the Northeast. Berger’s goal became reality in 2006, when Primedex acquired Radiologics, a network of imaging centers in several Northeastern states and changed its name to RadNet Inc. The purchase made RadNet the No. 1 provider of medical imaging services in the nation.

Since then, RadNet has been steadily acquiring imaging facilities.

“We’ve quadrupled the size of our business in the last five years and plan to double the size of our business in the next five years,” said Mark Stolper, RadNet chief financial officer, in a Jan. 13 presentation to investors.

Stolper said the company focuses on areas with large concentrations of elderly patients that tend to use more medical imaging services including the major urban centers of Southern California, the Northeast-mid-Atlantic region and Florida.

A driving force behind RadNet’s growth is a need for bargaining power when negotiating reimbursement rates with insurance companies.

“Our strategy is to be the largest provider in these markets so that we can have a seat at the table with payors,” Stolper said in the presentation.

The company is also growing through diversification into related medical imaging fields. In 2008, it bought BreastLink, a chain of breast cancer treatment centers based in Orange. Mammograms and other imaging services are a crucial part of breast cancer treatment.

In September, RadNet announced it was buying radiology software developer eRad Inc. for more than $10.7 million in cash and promissory notes. Stolper said the purchase allows RadNet to save $2 million a year in licensing fees that it pays to software vendors.

“We plan to grow this part of business; it has the high and attractive margins of a software company,” he said.

Within a few days of that purchase, RadNet’s stock shot up about 40 percent from its 52-week low of $1.83 per share to $2.58 per share.

Last month, RadNet announced it was buying Imaging on Call LLC, a Poughkeepsie, N.Y., imaging company specializing in emergency transmission and interpretation of diagnostic scans, for $5.5 million and an additional $2.5 million if Imaging on Call meets certain performance milestones this year. Imaging on Call works this way: Scans taken during off-hours in the emergency room are sent to technicians who communicate the results to doctors.

“It takes nighttime and weekend imaging interpretations away from hospital-based radiology services,” Stolper said.

During the trading-shortened Christmas week when the deal was announced, RadNet shares jumped 60 cents to $2.97 a share, a 25 percent increase.

Finally, earlier this month, RadNet announced it was buying two imaging centers in New York state from Presgar Medical Imaging Inc. for $2.2 million plus assumption of $700,000 of debt. This deal further boosts RadNet’s already significant presence in the state’s market. Investors responded by pushing RadNet’s stock price up an additional 12 percent to $3.35 per share.

Patient crunch

Nevertheless, RadNet’s operating results have been less than stellar. The company has been stung by drops in volume at its imaging centers as patients cut back on medical procedures and insurance companies become more hard-nosed about paying for the medical scans. The company reported a net loss of $280,000 in the third quarter. While substantially less than the $1.7 million loss in third quarter 2009, it was still worse than analyst expectations.

“Volumes remain weak as demand for health care services overall, including visits to the primary physicians who refer to RadNet facilities, continues to be affected by the recession and the loss of employer-based insurance,” said Robert Mains, an analyst with Morgan Keegan & Co. of Memphis, Tenn.

RadNet faces another challenge. In a conference call with investors, Chief Executive Berger said recent cases of excessively high radiation doses at Cedars-Sinai and other hospitals have caused a reduction in orders for CT scans, a drop that he hopes is temporary “as rational minds prevail.”

RadNet is also in a constant struggle with insurance companies, which are increasingly resisting preapprovals and reimbursements for scans. As this trend stepped up, RadNet launched a services division a few years ago that assumes all the radiology imaging services at a hospital for a fixed monthly fee, much like an HMO contract.

“We have strict utilization controls and review,” Stolper said in his investor presentation. “We push back and recommend not to do exams or to do less expensive exams when possible.”

So far, the division is mostly limited to California, where HMOs predominate. But Stolper said that the company plans to expand it to other parts of the nation.

“We love this book of business because it has predictable revenue and cash flow,” he said.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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